Lipper Inc., responding in part to investors' increasing appetite for sector, target date and international funds, is revamping its fund classification system.
On May 23, the Denver-based fund tracker will unveil 19 new open-end-fund categories.
"The industry has changed enough over the past couple of years that we need to be realigned to the new strategies that are out there," said Jeff Tjornehoj, senior research analyst at Lipper.
Lipper will add 11 sector fund classifications: consumer services, industrials, commodities, global natural resources, global health/ bio-technology, international real estate, consumer goods, basic materials, global real estate, global financial services and global science/ technology.
Some of the new sector fund classifications — such as global natural resources and global health/ biotechnology — are global versions of existing sector fund categories.
Lipper is also adding two new variations of its domestic-real-estate category: global real estate, which will be made up of funds that invest 25% to 75% of their assets in non-U.S. real estate investment trusts, and international real estate, for funds with more than 75% of their assets in non-U.S. REITS.
That's because global and international funds are less correlated than they used to be, Mr. Tjornehoj said.
"Going forward, I think we'll see more distinction in the performance of these groups," he added. "Real estate, in particular, is a local phenomenon. You would see far more variance on performance and at the same time on fund launches."
Jeff Keil, president of Keil Fiduciary Strategies LLC, an industry consulting firm in Littleton, Colo., concurs.
"The real estate market has the potential to grow much more vigorously," he said.
On the target date front, Lipper is modifying several classifications and adding four new ones to reflect the prevailing structure of funds in five-year increments. The new classifications include 2015, 2025, 2040 and 2045.
Previously, most of the funds were classified in 10-year groupings, said Mr. Tjornehoj.
Lipper will also roll out a category for extended U.S. large-cap-core funds, which would include 130/30 funds and other funds that combine long and short strategies to invest in a diversified portfolio of large-cap equities with a target net exposure of 100% long.
"There is a growing interest in 130/30 funds," said Mr. Tjornehoj. "Anecdotally, we expect to see new portfolio launches this year."
The company will also launch a diversified-leveraged-funds category, which will include funds that rely on leverage to outperform their index.
Some categories will be eliminated such as one for target maturity funds that invest in zero coupons and another for adjustable rate mortgage funds.
Several municipal-debt categories — Kansas, Hawaii, Alabama, Kentucky, Oregon and Tennessee — will also be eliminated.
The new categories are helpful, said Kevin Brosious, president of Wealth Management Inc., a fee-only
financial planning firm in Allentown, Pa.
"I often recommend international-real-estate funds," said Mr. Brosious. "This will be helpful to me to get a better handle on the risk-reward relationships between funds. I like to put a lot of non-correlating assets in people's portfolios."
The diversified leveraged fund is another helpful addition, he said.
"The long-short funds perform best when the market is going the other way," added Mr. Brosious. "I put it in as a stabilizer to mitigate some of the downside risk in a
bear market."
The new Lipper categories reflect realities in the fund world, said Eric Toya, wealth manager at Leonard Wealth Management of Redondo Beach, Calif., which manages $200 million in assets.
"The goal in the portfolio is to have multiple assets with dissimilar price movement, and the different movement causes more-stable portfolios," said Mr. Toya. "The change we are interested in is international real estate. We may recommend international real estate if the client has a large amount of assets in their home or rental property."
E-mail Sue Asci at [email protected].
